Test for FMA - proving manipulation in an easily manipulated market

​The civil proceedings by the Financial Markets Authority (FMA) against Mark Warminger for market manipulation while a portfolio manager for Milford Asset Management Limited will provide an interesting test case.

The law is well-established. The interest lies in trying to establish improper behaviour in the thin and therefore highly responsive New Zealand share market.

The case

Because the alleged manipulation occurred between December 2013 and August 2014 and so preceded the application of the Financial Markets Conduct Act (FMCA), the case is being taken under s11B of the Securities Markets Act 1988 (SMA). Most of the SMA provisions, however, have been carried forward, largely unchanged in the FMCA.

placing small trades directly on market in one direction, followed by large off-market trades in the opposite direction

trading that manipulates the closing price, and

trading conducted in order to set the price rather than for a genuine commercial purpose.

Civil or criminal

The FMA made the choice to take a civil rather than a criminal action.

Maximum criminal sanctions are imprisonment for five years and/or a fine of $300,000 for an individual, $1 million for a body corporate. Civil proceedings, which can be launched by either the FMA or by investors, can yield compensation orders and a penalty of (i) three times any gains made, (ii) the consideration for the transaction or (iii) $1 million, whichever is the greater.

The principal advantage to the FMA of civil proceedings in this instance is that they require a lower standard of proof – on balance of probabilities rather than beyond reasonable doubt. There is also no requirement to prove that Mr Warminger actually knew his trading would have the effect of creating a false or misleading appearance. It is sufficient to prove that he ought reasonably to have known this.

And a civil claim is open to settlement – whether a banning order or a fine – whereas a criminal prosecution will deliver a win or a loss.

If the FMA proves its case, it may open the way potentially for third parties to sue Milford and/or Mr Warminger. But the fact that the FMA has settled with Milford means that the claimants will be on their own in taking action for compensation against Milford. The FMA cannot join them.

Chapman Tripp comments

Trade based market manipulation generally refers to practices or conduct that involves the creation of a false or misleading appearance of active trading in securities, or the supply, demand, value or price for trading in those securities. The market can also be manipulated by mis-use of information, such as ‘pump and dump’ type campaigns.

This is only the second market manipulation case which has been pursued in New Zealand.

The first, last year, was against Brian Henry for manipulating the price of Diligent shares, a company he co-founded. Mr Henry admitted six breaches and was ordered to pay a penalty of $130,000. This was at the low end but the Court found that, although Mr Henry’s actions were deliberate, “he did not deliberately set out to breach the Act”.

Although there is little New Zealand precedent to draw on, there is a significant body of case law available as our market manipulation regime is similar to that in other jurisdictions, in particular, Australia.

The novelty – and the challenge for the FMA – lies in the peculiarities of the New Zealand market, the relative thinness of which means that entirely legitimate trades can look like market manipulation.

Fund managers with a large position in a small company who legitimately decide to off-load their holding can move that company’s share price. Similarly, on some stocks, a broker might be the only trader in the stock on a particular day.

These ambiguities did not apply in the Henry case as he admitted to engaging in matched transactions, where he was essentially trading with himself, and transactions where he placed multiple orders for buying and selling Diligent shares without completing the trades.